Steel Dynamics to go ahead with vertical integration

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Published February 01, 2013

| Reuters

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Steel producer and metals recycler Steel Dynamics INC. will continue to increase its vertical integration by boosting its captive raw materials supply, a company executive said in an interview this week.

Steel Dynamics, which can produce more than 6 million metric tons of steel a year at its five steel mills, receives about half of the steel scrap it needs to produce steel from OmniSource, a recycling business it bought in 2007.

The Indiana-based firm is completely self sufficient for pig iron, another necessary steel ingredient, which it receives from Mesabi Nuggets, its joint venture with Kobe steel <6506.T>.

"We have consistently made investment upstream in both iron making and scrap processing and we expect overtime to continue to grow those businesses," said Gary Heasley, Steel Dynamics executive vice president of strategic planning and business development.

"We will grow them with a fair bit of discipline though, meaning we won't be making investment in acquisitions that are valued too high not that are not a good fit," he said on the sidelines of an industry conference in Miami on Tuesday.

Consultancy Ernst & Young carried out a study on the top 30 steelmakers in the world that showed a mildly negative correlation between vertical integration of a producer and its profitability.

Steel Dynamics, which has a market value of about $3.4 billion, already sells half of the ferrous scrap and all the non-ferrous scrap OmniSource processes to other parties.

As production at Mesabi Nuggets increases, it will also be selling iron nuggets into the open market.

The steel producer reduced its capacity utilization in 2012 from a year earlier, in line with weaker market conditions, but it expects its steel production to increase a little in 2013 to respond to slightly better demand from the automotive and construction sector.

In the longer term Heasley expect steel demand in the United States to be supported by a return of manufacturing activity to the country.

"Lower shale gas cost is making the U.S. a much better location for manufacturing. Appreciation of foreign currencies against the dollar has also made the U.S. a more attractive place to manufacture goods. That is going help to build additional demand for steel," he said.

Steel Dynamics shares ended the day up 19 cents to close at $15.40 on the Nasdaq. Since December 31, the shares have risen more than 10 percent.